When does my portfolio need to be rebalanced?

Constructing your portfolio is the first step toward successful long-term investing. In other words, your asset allocation is your personal recipe for success. However, over time, your allocations might "drift" based on the performance of different investments in your portfolio, and one of your ingredients may begin to overpower the others. Portfolio maintenance may be needed when this happens.

As a basic example, let’s say your desired asset allocation is 60% stocks/40% bonds, and you invest $600 in stock ETFs and $400 in bond ETFs. But let’s say the stock ETFs grow to be worth $750 and the bond ETFs decline to be worth $350 after six months. Then you’ll no longer be holding a diversified 60/40 portfolio, which could expose you to more risk than you intended.

An unbalanced portfolio may increase your risk

Your asset allocation is tailored to your personal financial goals and risk tolerance, so it’s important to keep your portfolio aligned. For instance, if a 60% stock/40% bond portfolio is appropriate for you, a 70% stock/30% bond portfolio may not be. If your portfolio drifts in that direction, it may be necessary to rebalance it back the original 60% stock/40% bond allocation.

Look at these classic drifters -- allocations gone astray

This chart shows how four hypothetical stock/bond portfolios would have experienced significant drift over the past five years. For example, a portfolio that began with a 60% allocation to stocks would have 81% in that asset class after five years, giving it a very different risk profile!

Source: Clearnomics

Periodic rebalancing keeps you focused on your long-term goals

Looking at the examples above, it’s clearly important to keep your portfolio attuned to your needs by rebalancing periodically. Rebalancing helps you keep your eyes on the big picture — your goals, your tolerance for risk, and your investment time horizon -- rather than letting the market’s movements sway you off course. We automatically rebalance MoneyLion Plus members’ personalized portfolios as needed to keep them on track toward their goals.